June 04, 2012
Despite Volatility Models Still Favor Mid Cap and Growth
There are no changes to Northlake's Market Cap and Style model for May. The Market Cap model still favors Mid Cap and the Style model continues to recommend Growth. Client positions in the S&P 400 Mid Cap (MDY) and the Russell 1000 Growth (IWF) will be maintained until at least July.
The models reflect a sluggish U.S. and global economic outlook. Low interest rates and easy monetary policy provide an offset to slower economic data and the concerns emanating from Europe. Growth stocks, in particular, look better in this environment as investors seek shelter in companies able to grow their businesses against economic headwinds.
Given market volatility and many economic data releases varying form expectations, the underlying indicators composing the models had a number of changes last month. In the Market Cap model, the lousy market shifted the technical indicator tracking market breadth to more conservative large caps. However, as noted above, the sharp decline in interest rates created an offset with the bond momentum indicator moving in favor of more aggressive small caps. Low interest rates eventually lead to outperformance from small caps which benefit from easy access to credit. The Style model shifted slightly further into growth territory reflecting slower economic growth.
The models provided little value added in May against the market's sharp decline. One characteristic of May was that all markets fell about the same. Large, mid, and small cap indices each fell between 6% and 7%. Similarly, growth and value indices both fell around 6%. Given that mid caps are modestly aggressive and often volatile technology stocks are a significant component of growth indices, the models held up OK on a relative basis. However, that is little solace when account values are dropping sharply.
Disclosure: MDY and IWF are widely held by clients of Northlake Capital Management, LLC, inlcuding in Steve Birenberg's personal accounts. Steve Birenberg is sol proprietor of Northlake, a registered investment advisor with the State of Illinois. Filings can be found at www.sec.gov.
Posted by Steve Birenberg at June 4, 2012 08:58 AM in Models